When bonds are issued at a discount the discount amortized has what effect on interest expense?

The amount is a debit to interest expense, since it represents an increase of the stated interest rate of 8% on the bonds; this is the case because investors paid less than the face value of the bonds, so the effective interest rate to the company is higher than 8%.

When a bond is issued at a discount the amount of interest expense for an interest period is calculated by?

Interest Payment: Issued at a Discount

The interest expense is calculated by taking the Carrying Value ($91,800) multiplied by the market interest rate (7%). The amount of the cash payment in this example is calculated by taking the face value of the bond ($100,000) and multiplying it by the stated rate (5%).

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How will the amortization of discount on bonds payable affect bond interest expense?

When using the effective interest method, the debit amount in the discount on bonds payable is moved to the interest account. Therefore, the amortization causes interest expense in each accounting period to be higher than the amount of interest paid during each year of the bond’s life.

When a bond is issued at a discount the semiannual amount of interest expense will be greater than the cash payment for interest?

T/F: When a bond is issued at a​ discount, the semiannual amount of interest expense will be greater than the cash payment for interest. True, because interest expense includes both cash interest and amortization of the discount.

What happens when you amortize a bond discount?

A bond is sold at a discount when a company sells it for less than its face value and sold at a premium when the price received is greater than face value. … Under this method of accounting, the bond discount that is amortized each year is equal over the life of the bond.

What is the treatment of bond issue cost under the effective interest method?


The amortization of bond issue costs is recognized by debiting interest expense and crediting bond issue cost. Under the effective interest method of amortization, the bond issue cost should be aggregated to the discount on bonds payable and netted against the premium on bonds payable.

How is bond interest expense calculated?

To figure out the total interest paid, you take the face value of the bond, multiply it by the coupon interest rate, and then multiply that by the number of years corresponding to the term of the bond. … The total bond interest expense will be $1,000 x 2% x 5 years, or $100.

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How do you Journalize discounts on bonds payable?

The journal entry to record this transaction is to debit cash for $87,590 and debit discount on bonds payable for $12,410. The credit is to bonds payable for $100,000 ($87,590 + $12,410).

What are the two methods of amortizing discount and premium on bonds payable?

If the company uses the amortized cost approach to measure a long-term debt, it can use two methods to amortize the discount and the premium: the effective interest rate method, or. the straight-line method (allowed only under U.S. GAAP).

Is discount on bonds payable an asset?

If the contractual interest rate is less than the market rate, bonds sell at a discount or at a price less than 100% of face value. Although Discount on Bonds Payable has a debit balance, it is not an asset; it is a contra account, which is deducted from bonds payable on the balance sheet.

When a bond is issued at a discount the interest expense will be?

The present value of the bond’s face amount plus the present value of its periodic interest payments. if bonds are issued at a discount, over the life of the bonds, interest expense will: Decrease.

When interest rates increase what happens to bond prices?

Bond prices and interest rates move in opposite directions, so when interest rates fall, the value of fixed income investments rises, and when interest rates go up, bond prices fall in value.

Are bonds payable Current liabilities?

Generally, bonds payable fall in the non-current class of liabilities. Bonds can be issued at a premium, at a discount, or at par. Their pricing depends on the difference between its coupon rate and the market yield on issuance. When a bond is issued, the issuer records the face value of the bond as the bonds payable.

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Why do you amortize bond discounts?

A bond discount occurs when an issuer sells a bond and receives proceeds from investors for less than the face value of the bond. By amortizing a bond discount, the amount of amortization for each period can be used to determine periodic interest expense, as well as the changing bond carrying value over time.

What does it mean to amortize a bond discount or premium?

With regards to bonds payable, the term amortize means to systematically allocate the discount on bonds payable, the premium on bonds payable, and the bond issue costs to Interest Expense over the remaining life of the bonds.

Which of the following is a disadvantage of bond financing?

Question: A disadvantage of bond financing is: Bonds do not affect owners’ control. Interest on bonds is tax deductible. Bonds can increase return on equity It allows firms to trade on the equity. Bonds pay periodic interest and the repayment value maturity.

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